How to Get a Loan to Start a Business: Follow These 4 Steps

Here's Your Ultimate Guide to Getting a Startup Business Loan
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How to Get a Loan to Start a Business

Getting a loan to start a business is easier said than done. There’s no question—getting a business up and running is easier when you have a little money to work with. But where can you go to get the funds you need to get your startup off the ground when small business loans can be hard to come by as a startup? Well, there are the tried-and-true financing options for funding your new business: family and friends, private investors, crowdfunding, and more.

But these days, small business owners have another option: startup business loans. Unlike crowdfunding or investors, startup loans are traditional sources of small business funding. Startup loans allow business owners to work with traditional lenders, just as they would with other business loans.

Here are the four steps of how to get a loan to start a business:

  1. Review your startup costs. Be sure to understand what you’re using the loan for by reviewing the startup costs you face.
  2. Get your documents and registrations together. Take care of the basics like your business plan, your credit score, the necessary documentation, and the necessary registrations.
  3. Check your qualifications. Up your chances to qualify by improving your credit, building your assets, expanding your customer base, and updating your financial projections.
  4. Choose the right startup loan. Choose which type of startup loans you want to go for—equipment financing, business lines of credit, business credit cards, or credit line builders.
  5. Apply. Last, simply apply! If you do get an offer, be sure to read the fine print before you accept.

We’ll cover all the details of these four steps in our comprehensive guide to getting a loan to start a business:

Check Your Loan Options

1. Review the Startup Costs You Need to Cover

Small business owners encounter a lot of obstacles when it comes to starting a company from scratch. A common hurdle that entrepreneurs are sure to face? Startup costs.

There are a variety of startup costs that you might encounter when you’re getting your small business up and running. Every business’s list of expenses will be different, but here are some common costs that come with starting a business:

  • Equipment purchases, like cash registers, machinery, and vehicles
  • Technology purchases, like computers, tablets, and printers
  • Initial inventory purchases
  • Permits and licenses, like city, country, and state licensing
  • Initial office supplies
  • Business furniture

After you pay these initial costs, you’ll have ongoing expenses—like taxes, rent or mortgage payments, employee payroll, etc.—that’ll you need to cover as you grow your startup.

How to get a loan to start a business? Your first step is knowing exactly what initial and ongoing costs you’ll need to cover, and how much you need to pay them. Once you have a solid understanding of how much funding you need, you’re ready to pursue your startup funding options.


2. Get Your Documents and Registrations Ready

As many small business owners can attest, getting a business loan to finance your new business venture can be challenging. Traditional lenders are hesitant to finance a young company with no business history and no proven revenue.

But, startup businesses have a better shot at securing financing when the founders do some preparation before starting their search for the perfect startup loan.

Wondering to yourself, “How do I get a loan to start a business?” The first step to getting a loan to start a business is making sure you have the necessary documentation together to start your startup loan search.

Prepare a Business Plan

Lenders are typically hesitant to finance a startup because, understandably, they don’t have much information about your business to go off of. How do they know if your business will take off? How can they be sure that you’ll be a responsible business owner, dedicated to making your startup a success?

Having a well thought-out and thorough business plan is a great way to convince the lender that funding your startup is a smart investment. Your business plan should include your financial projections—future sales, profits, income, cash flow, and so on—and more qualitative goals for your business. How will you make a unique and important contribution to the market you’re in? Where, and how quickly, will your business grow?

You know that your startup has what it takes to be successful, but your lender doesn’t. You can take them out of the dark with a solid business plan. If you haven’t made one yet, here are some business plan templates you can use to put one together.

Learn how to write the perfect business plan here.

Register Your Startup With Your Local Government Agency

Before they fund your startup, lenders will want to see that you’ve taken the steps to make your business official.

This means that you’ve officially filed your business with the necessary parties and have all the required licenses and permits needed to operate your business.

Here’s a checklist of what licenses you need to prepare as a startup looking for funding.

Prepare the Necessary Documentation

How to get a loan to start your own business? Be prepared. Your list of business loan requirements will vary from lender to lender, but there are documents that almost every lender will require: bank statements, income statements, personal tax returns, resume, financial projections, and so on.

Getting a small business loan can be a time consuming process, and organizing your information can be a hassle. But, you’ll save a lot of time on your startup loan application if you get these documents ready before you apply.


3. Check Your Qualifications for a Startup Loan

Improve Your Credit Rating

When securing funding to grow your business, your personal credit score is more important than you might think. As a startup founder, you won’t necessarily have any established business credit history to prove your creditworthiness. So, lenders will look at your personal credit score as a way to gauge how reliable you’ll be as a borrower.

Figuring out how to get a business loan to start a business will be easier if you have a stellar credit score. Banks will offer financing to borrowers with credit scores of 680+. Anything below that and you’ll likely be a better fit for a non-bank lender.

Before you get too far into your search for getting a startup business loan, make sure you know where your credit score stands. If it isn’t where you want it to be, you can take steps to improve it!

Getting your credit score in great standing will help you secure the financing you need to start your business.

Consider Your Time in Business

Your time in business matters a lot for the business financing options you can qualify for. In the eyes of a small business lender, the more time you have in business the better. Showing that you have a few years under your belt proves that you can withstand the regular ups and downs that come with running a business. You’ve established your presence.

Now, you’re looking for a loan to start a business, so you likely don’t have that much time in business. However, having just 1 month in business versus 6 months in business does make a difference. You’ll have more options available to you if you have 6 months or even a year in business, so consider waiting it out until you meet that benchmark before applying to a startup loan.

Review Your Annual Revenue

Now, you might not even have a year in business—making annual revenue a little hard to look at.

If that’s the case, check out your monthly revenue.

Many online lenders require a minimum annual or monthly revenue to qualify for any type of loan. They want to make sure you’re bringing enough money in on a regular basis to cover your loan payments.

Just be aware that, when it comes to startup loans, you might have limited options at first because you haven’t really started making any money yet. If this is the case, try to your best to bring in steady revenues month after month. That way when you apply for a loan to grow your startup business, you have consistent monthly revenues to show the lender.

Review Your Cash Flow

While lenders might not necessarily look at your cash flow, you should be looking at it—especially when you’re trying to learn how get a business loan to start a business.

Cash flow measures the cash coming in and out of your business. As a startup, you might find that more cash flows out than into the business. That’s a common problem many newer businesses face.

It’s important to look into the strength of your cash flow before you take out financing to grow your startup. Many startups only qualify for daily or weekly payment loans, which can put a real dent in cash flow. If you have strong cash coming in each week, then you may be fine covering frequent payments. But you don’t want to end up in a situation where you can’t cover your loan payments because your cash flow is weak.


4. Choose the Right Startup Loan

Now that you know how to get a loan to start your own business, you’re ready to start your startup loan search.

We’ll break down the ins-and-outs of each small business startup loan option out there, so you can make the most informed business financing decision.

Equipment Financing

If you’re starting your business from scratch, you’ll probably need to purchase some equipment to get your company up and running. You might need to buy cash registers, computers, delivery vehicles, or machinery. Unfortunately, the equipment you need to start your business can be pricey—and you might not be able to pay for it out-of-pocket.

Luckily, you can use equipment financing as a startup loan to help you pay for these costs. With equipment loans, you can finance up to 100% of the cost of the equipment you need.

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How Does Startup Equipment Financing Work?

When you think of small business loans, a traditional term loan or a business line of credit probably comes to mind first. While equipment financing can give you the money your startup needs to grow, it works a little differently than traditional business loans.

An equipment loan is an asset-based loan. Simply put, an asset is a thing you own—it could be a vehicle, a piece of real estate, machinery, or a selection of inventory. Instead of relying on a borrower’s business history or credit score, an asset-based loan relies on the value of the asset, which acts as collateral for the loan. In a word, equipment financing is a startup business loan with no collateral required.

With equipment financing, the piece of equipment you’re purchasing acts as collateral for the loan. The amount you get for the loan depends on the value of the equipment—which is a good thing if you’re just starting up and you don’t have a strong track record for your business yet. Because the equipment acts as collateral, lenders are able and willing to take a little more risk and offer a lower interest rate than they would with other types of loans.

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The Advantages of Using Equipment Financing as a Startup Loan

There are a lot of reasons why you might want to use equipment financing to fund your startup.

When you apply to an equipment loan, you won’t have to provide as much paperwork. The equipment itself acts as collateral, so the lender won’t need to see a ton of information on your business’s history. Less paperwork on the borrower’s end means less processing time on the lender’s, so you can get fast access to cash.

With startup equipment financing, you can get the cash you need in as little as 2 days. Instead of gathering the money you need to personally front the cost of the equipment before your business opens, you’re able to get cash right away. Then, you can pay off your equipment loan as your business grows and makes money.

A downside to using equipment financing to fund your startup? Only business owners with great credit scores will be considered. In fact, you’ll need a personal credit score of 680 or higher to secure a startup equipment loan.

Business Lines of Credit

When you’re brand new and wondering how to get a loan to start a business, you might not know what kind of financing needs you’ll have as you grow. If you’re looking for an all-purpose startup loan that can finance your business’s ongoing operations, you might want to consider a business line of credit.

When you open a business line of credit, you can use the funds for a number of things, whenever they arise:

  • Supplement gaps in cash flow
  • Get more working capital
  • Buy more inventory
  • Pay off more expensive debt
  • Payroll for temporary employees
  • Backup coverage of unexpected costs
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How Does a Line of Credit Work?

When you’re approved for a business line of credit, you’re given a pool of funds that you can tap into whenever you want or need. Once you pay back what you’ve taken out, plus interest, your line of credit gets refilled to its original amount.

A line of credit is a great financing option for young startup businesses because you don’t have to pay interest on the funds you receive right away, as you would with a more traditional loan. Instead, you only pay on what you draw from your line of credit, and when you take from it. With a line of credit, you can expect to pay 7 – 25% in interest payments.

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What Will a Business Line of Credit Cost You?

To better understanding both the structure and costs associated with a business line of credit, let’s look at some numbers.

Say you’re just starting out, and you think you’ll need around $25,000 to meet your many financing needs. Your business is starting to take off, and to meet your demand, you need to buy some additional inventory. You need $5,000 to buy your inventory, so you pull $5,000 from your line of credit.

Even though you have a $25,000 line of credit, you’ll only need to pay the lender back what you borrowed, plus any interest. Also, keep in mind that the interest is only charged on the $5,000 you borrowed, not the entire line of credit.

So, if your interest rate is 10%, you’ll end up paying the lender back $5,500 (or $5,000 plus $500 in interest). And when that’s paid back, you can continue to make additional draws up to the $25,000 you have in total.

Business Credit Cards

These days, plenty of business owners turn to business credit cards when looking to finance their startup. Using a business credit as a small business loan gives your startup access to a revolving line of credit. This means that you always have the capital on hand to use for purchases or cash withdrawals, without hassle or delay.

Before you commit to using a business credit card to fund your startup, make sure you know the ins-and-outs of this financing option.

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The Advantages to Using a Business Credit Card as a Startup Loan

Here’s why every startup business owner needs a business credit card from the moment they open their business’s doors.

Get Funding Quickly

If you’ve applied to a more traditional business loan before, you probably know that the application process isn’t a speedy one. For instance, if you apply for a traditional term loan or an SBA loan, you might not see the funding you need in your bank account for months.

Startup founders usually can’t afford to wait on the money they need to grow. So, using a business credit card as a startup loan makes sense for business owners that need quick turnarounds.

No Need for Collateral

Traditional financial institutions and commercial lenders will ask you to provide collateral for most small business loans. With a business credit card, you don’t need to put up any collateral to apply.

If you don’t want to risk your personal assets on your startup venture—or if you don’t have any to do so—you can still get the funds you need from using a business credit card.

Flexibility

Like business lines of credit, business credit cards are flexible products. You’ll have the freedom to borrow as much as you want or need each month. If your business starts off slow in the beginning, but really ramps up after a few months, you can start using more money to finance your growth—as long as you stay within your credit limit.

0% Introductory APR

Some business credit cards will offer you a 0% introductory APR. This is huge for businesses that want to save money on heavy fees. Plus, if you have existing balances on other credit cards for your business, you can transfer them over.

The ability to take advantage of a 0% introductory APR is a great reason to apply for a business credit card. But remember, these offers are introductory rates. Make sure that you can pay the balance before the rate increases. Also, some credit card companies only offer a promotional introductory APR rate for businesses with high credit scores—so check to see if you qualify in the first place.

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Credit Cards Can Negatively Affect Your Credit Rating

Before you use a business credit card as a startup loan, be wary of the balance you plan on putting on your card.

If you carry a high balance on your credit card, you run the risk of negatively affecting your business’s credit score—or even your personal credit score. This could hurt your chances of securing a larger, more traditional business loan once your startup is off the ground and growing fast.

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Watch Out For High Rates & Missed Payment Fees

The 0% Introductory APR is a big draw to business credit cards, and for a good reason, too: you’ll save a lot of money on your business financing.

But, when the promotion goes away, you’re subject to a variable APR. Depending on the current prime rate, the APR on your credit card could be steep. If you’re not sure that a business credit card is worth it due to its APR, compare the rate you’re getting to what you’d pay with another small business loan.

Also, with a business credit card, you should be prepared to pay on time, and in full—every month. A business credit card can be a great way to finance your business, but you can also get wrapped up in your repayments. Whereas a traditional term loan has automatic repayments, business credit card debt might be a little harder to keep track off.

If you aren’t careful with your repayment habits, you might be subject to steep missed payment fees—building up more debt for yourself in the end.

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Line of Credit Vs. Business Credit Card: Which Startup Loan is Right for You?

When you’re wondering how to get a startup business loan, there are a lot of options on your plate.

Business lines of credit and business credit cards might seem like pretty similar products, but there are a few key differences between them. Because of this, the two products will fit different kinds of business financing needs. Which product is right for you? Here’s how you might decide:

When to Use a Line of Credit

Use a line of credit when you need flexibility for your repayment schedule, and you want to have a lower lower interest rate (if you can qualify for one).

When to Use a Business Credit Card

Use a business credit card when you want to earn rewards on your purchases, you can handle a monthly repayment schedule, and you might not qualify for more traditional loan products.

Our favorite business credit card for startups? The Blue Business Plus from American Express.

Credit Line Builder

As you’re searching for tips on how to get a business loan to start a business, you might stumble across the credit line builder.

Small business owners might be unfamiliar with this product, and for a good reason, too—they’re one of the less traditional startup loans out there.

But, a credit line builder might be the right option for funding your startup.

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How Does a Credit Line Builder Work?

Here’s the deal with a credit line builder.

You work with a financing company to apply for multiple business credit card applications at once—saving you time and effort.

You’re then approved for a credit amount that will equal the combined maximum amount of all the credit cards you qualified for. Now, you have access to that set of credit cards, and you can use them to make purchases—and quickly build business credit.

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What to Keep in Mind with a Credit Line Builder

You’ll need to be careful that you don’t spend too much with any of the business credit cards available to you. Late payments and high utilization across multiple business credit cards can really hurt your credit score. One late payment might not lower your credit score too much, but if you get behind a few months in a row, your credit score will take a serious hit. Speaking of credit scores, you should be aware that a credit line builder is only a viable option for borrowers with a credit score of over 700.

The best way to think of a credit line builder? It’s a tool, not a crutch. If you choose to use this financing option, make sure you’re a smart spender. Keep a check on your spending and make payments on time. If you follow these best practices with a credit line builder, you’ll benefit from the fast credit building and access to capital it provides.


4 Tips for How to Get a Loan to Start a Business

Let’s review what we’ve covered so far. You know why you need to take out a startup loan and what small business startup loans are out there. What about best practices for how to get a loan to start a business?

Well, there are steps you can take to make your startup fundable, and convince lenders that financing your growth is a smart move.

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Boost Your Credit Rating

How to get a loan to start a business? There are a lot of answers to that question. One, very big part of the answer? Have a great credit score.

Credit scores are the first things lenders look at when deciding whether to fund your small business. Some startup founders are seasoned entrepreneurs with high business credit scores, but some startup owners are new to the game. If this is the first business you’ve started, you probably don’t have an established business credit history. If this is the case, your personal credit score will be used to gauge your credibility as a borrower. If your credit score isn’t where it needs to be, you can take steps to improve it.

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Build Your Assets

To secure a startup loan without a lot of proven business history, lenders will require that the startup owners have some sort of collateral. As a startup, you probably don’t have a lot of business assets, like real estate, equipment, or inventory. Instead, lenders might ask startup founders to provide personal assets, like a home or a car.

Of course, putting your personal assets on the line can be very risky. If you can’t pay back your loan, you won’t only lose your business—you might end up losing your home, car or other property.

Don’t want to put up your personal assets, but don’t know how to get a loan to start a business otherwise? Well, you can do try two things:

Approach investors.

If you have an established relationship with an investor, you can ask them for the funds you need to buy assets for your business. Then, you can use these assets to secure a loan with a commercial bank or other lender.

Try the SBA.

You might want to consider an SBA loan. The SBA offers a CDC/504 Loan Program, designed to help companies purchase real estate and equipment—which can serve as collateral for a loan you need in the future.

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Build Your Customer Base

Lenders will be more comfortable funding a startup if they have a proven, reliable and large customer base—and a strong cash flow from it.

If you want to get more customers, you might need to up your marketing efforts, update your website, or publish more content related to your brand.

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Keep Updating Your Financial Projections

If you’re tackling how to get a loan to start a business, you know that you need a viable business plan in place. When you approach lenders, you’ll want to make sure that you’ve updated the financial projections in that plan, and that your projections are still realistic.

To make sure you’re not giving your lenders guesses, always keep up to date with where your business’s finances are going.

With this information in mind, you’re well equipped to go out and look for funding options for your new business. Good luck!

Check Your Options

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